Floods slow rail shipments, could hit GDP hard

Market experts debate economic impact of floods.

By Dave Hannon -- Purchasing, 6/30/2008 6:15:00 AM

The devastating floods in the Midwest continue to wreak havoc with logistics lanes and have market watchers concerned about broader impacts on the U.S. economy.

The Association of American Railroads said freight carried on railroads for the week ending June 21 totaled 318,275 carloads, down 5.7% year-over-year. Union Pacific said last week its crews have worked off the backlog of trains and all trains are moving over normal routes in the flood-impacted Midwest area. BNSF said in a service advisory this morning that BNSF’s main lines between Chicago and Kansas City via Fort Madison, Iowa, and Marceline, Mo., and via Quincy, Ill., are open, as floodwaters receded and track was re-opened over the weekend. But there are still major lines not open due to flooding or damaged track.

Beyond service impacts, the floods and resulting lower volumes are expected to hit the already-struggling transportation companies’ revenues and could put more trucking and rail-related companies out of the market.

“We expect the flooding that hit the Midwest to impact most transportation companies by a couple pennies (per share), mainly because of the increased costs associated with rerouted traffic," said Lee Klaskow, senior transportation and logistics analyst at Longbow Research in New York in a recent Reuters report.

"An unprecedented run in fuel prices and a slowing economy were already limiting rails' second-quarter earnings growth, but historic flooding in the Midwest should only add to the near-term troubles," Morgan Stanley analyst William Green wrote in a recent report.

The overall impact of the floods on the U.S. economy is a topic of debate right now. "It's just another thorn in the side," said Douglas Porter, an economist at BMO Capital Markets, in a recent Associated Press report. Porter predicted the floods would shave a few tenths of a percent off the country's annual gross domestic product, a measurement of all goods and services produced in the U.S.

But a recent report out from risk management firm Storm Exchange says approximately one-third of total U.S. corn crop and 30% of the total U.S. soybean crop were impacted by flood conditions. But Paul Walsh, Chief Strategy Officer at Storm Exchange, says, “While crop yields are sure to be impacted, the ramifications are much more far-reaching. In the current economy, agriculture production has become a lynchpin to hold back inflation; a supply interruption of this scale will create ripples throughout the economy.”

Overall, Storm Exchange projects that 12% of U.S. GDP and 14% of corporate profits will be negatively affected by the Midwest floods, citing data from the U.S. Bureau of Economic Analysis and Storm Exchange's proprietary risk analytics.

For more information, see Purchasing.com's Special Report: How the Midwest floods are affecting purchasing

(Photos courtesy BNSF)